Taxpayers and Retirees: Heed These Deadlines To Avoid Pitfalls

I’m betting that no one wants to pay more taxes than they must or be penalized for not following IRS rules. So as summer winds down, there are a few deadlines looming that taxpayers – and retirees in particular – will want to know about:

Sept. 30 – If you inherited an IRA from someone who died last year and a charity was also listed as a beneficiary, this is the last day to redeem the interest that was specified for the charity. If you don’t cash out the charity’s interest, then you (and any other “people” beneficiaries) will be forced to take full distributions within five years. You would lose years of tax advantages by taking withdrawals over five years instead of over your lifetime.

Here’s another important tip: Don’t combine that inherited IRA with one you already have. Open a separate new account for the inherited IRA, says PeterD’Arruda, president of Capital Financial Advisory Group in Cary, N.C., and host of the weekly radio show, Financial Safari. When you do, he says, you can stretch the withdrawals of that account over your lifetime so that the rest of the funds can grow tax-deferred. If you’ve already combined the two, however, the action cannot be reversed. “There’s no forgiveness by the IRS for that,” he says.

Oct. 15 – If you converted money from a retirement account to a Roth IRA during 2011, and you now want to reverse that conversion, this is the last day to do it. Let’s say you converted $100,000 from your traditional IRA to a Roth, but now your account is worth $80,000, thanks to a down market. You’d pay taxes on the lesser amount, not the $100,000 that you converted to a Roth. And that would lower your tax bill.

Oct. 15 – This year, April 17 was the deadline to file your federal tax return. However, if you sought an extension, this is the last day to file your return and pay any amount that’s due. Pay by this day and avoid the late-filing penalty, typically 5 percent per month based on the unpaid balance.

Dec. 31 – This isn’t just New Year’s Eve. It’s the deadline to take the required minimum distribution (RMD) from your retirement account for those over age 70½ (specifically, you must take withdrawals by April 1 of the year after turning 70½) as well as for IRA beneficiaries of deceased IRA holders. If you don’t make the required withdrawal, you will be hit with a 50 percent penalty. “People overlook this and it’s huge,” says D’Arruda. “I recommend that people take out their RMDs in November so they don’t wait and mess something up. A lot of people have more than one IRA so you have to be careful to take it out from all the accounts.”

To calculate your RMD, you take the account balance on Dec. 31 of the previous year and divide it by the number of years left in your life expectancy (based on the IRS’ “Uniform Lifetime” table).